The Role of Budgeting
• TEACHING OBJECTIVES
• 1. Introduce the purpose of budgeting.
• 2 Identify Cashflow Budgeting
• 3. Show the benefits & limits of budgets.
• 4. Show how the budgeting process works.
• 1. Introduction
• Once a farm has identified customer needs & changes
through forecasting, it needs to determine if it can be met
• A . Knowing how to budget is certainly part of this process.
• B. A budget is a master financial plan or a "blueprint for
action" in the future.
• 11. The Purpose of a Budget
• A. A budget is a formal estimate of future revenues & costs
• 1.A detailed breakdown of all costs & revenues is necessary
for attaining profit goals: Farms have to analyze operations
to develop reliable estimates of revenues & costs.
• 2. If budgeting is done right, it forces better thinking about
the farm's goals & purpose & how to achieve them. It forces
mgmt to ask what to be done if certain target levels of sales
& costs are to not being realized.
• B. Making realistic budgets requires clear thinking; As a
financial plan of firm’s expectations over time, it shld be a
an assessment of what each part of the firm can accomplish
• Make separate budgets for each part of business:
• 3. Follows with Cost & Expenses Preparation:
Requires forecasting variable operating & fixed
expenses. It uses accounting principles in its
• V. The Cash Flow Budget
• 1 To identify cash flow budgeting as a tool for financial
decision making & business analysis
• 2 To understand structure & component of cash flow budget
• 3 Illustrate the procedure for completing a cash flow budget
• 4 To describe both the similarities and differences between
a cash flow budget and an income statement
• 5 Discuss advantages & potential uses of a cash flow budget
• 6 To show how to use a cash flow budget when analyzing a
possible new investment
• Characteristics of a Cash Flow Budget
• 1. Records sales, & expenses according to when they are received or
paid:CFB shows amount & timing of cash expected to flow in & out
of the firm during budget period. –i.e. its a summary of projected cash
inflows & outflow for a business over a given period of time in an
organised time sequence.
• a. Cash Inflows: Come from sales, services, borrowing, sale of capital
items, & from payments on accounts receivable.
• b. Cash Outflows: Include payments for goods & services purchased,
debt, taxes, salaries, capital assets.
(sales, new loans etc)
• Cash outflows
(expenses, debt payment
loans payments etc)
• 2. CFB shows Cash Receipt & Disbursements: Shows when
cash shld be available & when cash payments must be made
– i.e. assist mgmt plan when cash will be in surplus/ deficit
• 3. CFB is a forward way of cash planning. It serves as a
tool for investing excess cash & borrowing needed cash:
CFB allows mgmt to invest surplus cash to earn extra
income or help to decide when & how much to borrow in
deficit periods & ability to repay loanns
• Structure Of A Cash Flow Budget
• Table 1 a condensed form of structure & format of a CFB is
Table 1 Simplified Cash Flow Budget
Time Prd 1 Time Prd 2
• 1. Beginning cash balance $1,000 $ 500
• Cash inflow (Sources):
2. Farm product sales $2,000 $12,000
3. Capital sales 0 5,000
4. Miscellaneous cash income 0 500
5. Total cash inflow $3,000 $18,000
• Cash outflow (Uses):
6. Farm operating expenses $ 3,500 $ 1,800
7. Capital purchases 10,000 0
8. Miscellaneous expenses 500 200
9. Total cash outflow $14,000 $ 2,00
• 10. Cash balance (line 5 - line 9) -11,000 16.000
11. Borrowed funds needed $11,500 0
12. Loan repayments (principal and interest) 0 11,700
• 13. Ending cash balance (line 10 + line 11 - line 12) 500 4,300
• 14. Debt outstanding $11,500 $ 0
• Potential Sources of Cash:
• 1. The beginning cash balance or cash on hand
• 2. Product sales or cash revenue from business operation
• 3. Capital sales - cash received sale assets like land,
machinery, breeding livestock, & dairy cattle
• 4. Non-business cash receipts – such as non-farm cash
income, cash gifts, & other sources of cash
• 5. New borrowed capital or loans received
• The last source is not included in the cash inflow section
because borrowing requirements are not known until the
cash outflows are matched against the cash inflows.
• In prd 1, total cash inflow of $3,000 includes beginning
cash balance. The total cash outflow = $14,000. Projected
cash balance = -$11,000. This deficit will require borrowing
$11,500 to provide a $500 minimum ending cash balance.
• Uses of Cash:
• 1. Farm operating expenses – i.e. the usual cash expenses
incurred in producing the farm revenue
• 2. Capital purchases – i.e. full purchase price of new capital
assets e.g. land, machinery, & dairy/breeding livestock
• 3. Non-business & other expenses – i.e. cash used for living
expenses, income & social security taxes, etc.
• 4. Principal payments on debt – i.e. Interest payments shld
also be included here unless they were included as part of
the operating expenses.
• Ending Cash Balance:
• Difference btwn total cash inflows & total cash outflows for
any time period.
• Constructing a Cash Flow Budget
• The following steps summarize the process & info needs.
– 1. Develop a business plan. It’s impossible to estimate cash
revenues & expenses without knowing what to be produced.
– 2. Estimate crop pdn & livestock feed reqr’mts. Most, if not all, of
this info should be found in the whole farm plan.
– 3. Estimate cash receipts from livestock enterprises. include sales
of livestock as well as livestock products such as milk & wool.
– 4. Estimate cash crop sales.
– 5. Estimate other cash income. Include interest & dividends on
investments & non-farm sources of cash revenue.
– 6. Estimate cash operating expenses.
– 7. Estimate personal & non-farm cash expenses. e.g. cash needed
for living expenses, income & social security taxes.
– 8 Estimate purchases & sales of capital assets e.g. purchase price
of buildings, breeding livestock, land to be purchased & total cash
to be received from capital assets sale
– 9. Record scheduled principal/interest payments on existing debt.
• Uses For A Cash Flow Budget
• Primary use of CFB is to project timing & amount of new
borrowing & loan repayment a business will need during the
year. Other uses and advantages are:
• 1. CFB can prevent excessive borrowing & shows how
repaying debts ASAP will save interest.
• 2. CFB may suggest ways to rearrange purchases &
scheduled debt repayments to minimize borrowing.
• 3. CFB combines both business & personal financial affairs
into one complete plan.
• 4. A lending agency can offer financial advice & spot
weaknesses/strengths in a business based on completed CFB
• 5. Can assist managers to obtain discounts on input
purchases by making a prompt cash payment.
• 7. CFB can help spot imbalance btwn short, intermediate &
long-term credit and suggest ways to improve the situation.
• VIII. Budget Benefits
• A. It helps managers better understand their business
• B. It provides a "yardstick" by which business
performance can be measured by others.
– 1. should be checked frequently to see progress
– 2. if negative deviations are found, it permits quick
corrective action before things get worse
• IX. Summary
• A. Budgeting is a critical step in business planning
• B. It puts ideas into numbers for profit or loss
• C. Budgets are valuable tools in good management